For Nonprofits, E-filing Required for Most Tax and Information ReturnsBy Magdalena M. Czerniawski | June 18, 2021
As the IRS requires increasingly more tax and information returns to be filed electronically, nonprofit organizations are finding advantages and disadvantages. E-filing generally is faster, more accurate and results in faster refunds when they are due. However, smaller nonprofits that are accustomed to filing paper returns are sometimes challenged by the shift to e-filing.
The Pension Protection Act of 2006 was the first time the IRS required small tax-exempt organizations to file the Form 990-N. Form 990-N, required for most tax-exempt organizations with gross receipts less than $50,000, must be e-filed and there is no paper filing equivalent. In addition, organizations filing the Form 990 series that had more than $10 million in assets and filed at least 250 returns annually were required by the law to file their tax returns electronically.
The move toward e-filing picked up steam with enactment of the Taxpayer First Act (TFA) of 2019, which requires all tax-exempt organizations to file Form 990 series returns and Form 8872 reports electronically. There is no longer a way for smaller organizations to file paper returns. These new filing requirements became effective for tax years beginning after July 2, 2019; therefore, they are now in effect for all organizations. It’s important to note the e-filing requirement also includes Form 990-PF Return of Private Foundation. This is probably the least e-filed return due to requirement to attach statements for sales and holdings of various investments.
Since the TFA was enacted, the IRS has worked to update its software and the Form 990 series and schedules to fulfill the requirements of the law.
Electronic filing is advantageous to tax-exempt organizations, as it not only provides for quick turn around and acknowledgement that a return was accepted or rejected by the IRS, but also reduces errors that would never be caught if the organization filed a paper return. Additionally, especially during the Covid-19 pandemic, the e-filing capability was a saving grace for many nonprofits that weren’t able to physically mail their returns.
E-filing allows greater transparency not only from organization’s perspective but also from the IRS’. Since implementing e-filing requirements for these forms, the IRS has performed various reviews of forms filed not only to ensure that organizations are in compliance with the law, but also to ensure that the various rules are understood by the public. In addition, the IRS has offered workshops to educate smaller organizations and their stakeholders. The U.S. House of Representatives’ Ways and Means Committee believes that e-filing “will improve efficiency, reduce costs and generally improve oversight of tax-exempt organizations.”
Form 990-T, which reports unrelated business income, only became available for e-filing earlier this year and e-filing now is in effect for all 2020 returns. Had Form 990-T been allowed for e-filing sooner, all organizations requesting refunds of taxes paid for the transportation benefits would have been able to receive refunds much sooner. Unfortunately, this wasn’t the case and many organizations are still waiting for their refunds.
It’s important to note that Form 990-T was redesigned to allow this e-filing requirement. In addition, right now there are very few instances in which a paper filing is allowed, and organizations filing by paper that don’t meet these very narrow exceptions will receive a notice from the IRS notifying them to e-file their returns within a short time frame, usually 15 days. Therefore, it’s important to e-file from the start.
As of June 16, 2021, private foundations required to file Form 4720, Return of Certain Excise Taxes, are also included in the e-filing mandate.
Transparency is not only important from the IRS’ perspective, but also from the nonprofit sector’s. If organizations have more information they can make better decisions. This transparency helps lawmakers, organizations and the public. It also helps detect and prevent fraud, and helps the sector overall by showcasing best practices and leadership. For websites like Charity Navigator and Candid, formerly GuideStar, availability of Form 990s is crucial to helping the public decide where to donate their dollars.
In addition to the above-mentioned requirement, Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and Form 1024-A Application for Recognition of Exemption Under Section 501(c)(4) are also required to be e-filed. E-filing of those forms allows the IRS to process the applications quicker and reduce errors in submission. This in turn helps organizations receive their determination letters in a more reasonable timeframe. This became extremely important during the pandemic.
Organizations can e-file forms either through an accounting firm’s software, such as Marks Paneth’s, or through various IRS-approved websites.
While the shift to e-filing from the more familiar paper filing may be challenging to some nonprofit organizations, e-filing requirements will help the tax-exempt sector in the long run and benefit the public.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +